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Elanco (ELAN) Stock Declines After Sale of Aqua Business

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Shares of Elanco Animal Health (ELAN - Free Report) have declined 6.1% since Jul 9, following the completion of the divestiture of its aqua business to Merck Animal Health, a subsidiary of Merck & Co.  (MRK - Free Report) , for approximately $1.3 billion in cash. Although its shares are down, Elanco is focused on the long-term positive strategic move that will enable the company to concentrate on high-value opportunities in pet health and livestock sustainability while enhancing its financial flexibility.

The company plans to use the net proceeds of $1.05-$1.1 billion to pay down debt in the third quarter of 2024. This transaction is a pivotal step in Elanco's strategy to strengthen its balance sheet and deliver long-term value to shareholders.

Significance of the Divestiture

Per Elanco, the divestiture of the aqua business to Merck represents a significant milestone in the company's strategic plan to sharpen its focus on core areas of pet health and livestock sustainability.

By generating substantial cash proceeds, this sale enhances Elanco's ability to reduce its debt burden, thus improving its financial stability and operational flexibility. The transaction, coupled with increased free cash flow from ongoing operations, positions Elanco to pay down approximately $1.3 to $1.4 billion of debt in 2024. Apart from the divestiture, Elanco expects to generate $280 million to $320 million of cash from its core business. The planned reduction in debt will bring net debt to adjusted EBITDA to the mid-4x range by year-end.

In 2025, further improvements are projected, with net debt to adjusted EBITDA reaching the high-3x to the low-4x range. This debt reduction strategy enhances Elanco's financial stability and positions the company for sustainable growth. Additional details will be provided on the second-quarter earnings call in August.

Industry Prospects

Per a report in Precedence Research, the global pet care market was valued at $302.89 billion in 2023. It is anticipated to reach $597.51 billion by 2033 at a CAGR of 7%.

The growth of the global pet care market will be fueled by animal nutrition, which is growing due to the changing preferences of pet owners. The pet care market is expanding rapidly, offering a variety of products and services, ranging from premium food and designer clothing to luxurious grooming and spa treatments. Moreover, the increasing popularity of pet fashion has led to significant growth in the pet grooming industry.

Another Recent Development

In May, Elanco announced that the FDA has completed its thorough review of Bovaer (3-NOP), a groundbreaking methane-reducing feed ingredient. The FDA has determined that Bovaer meets all safety and efficacy requirements for use in lactating dairy cattle. Bovaer, which reduces methane emissions by approximately 30% per cow, represents a significant innovation in Elanco's portfolio, enhancing livestock sustainability. The company expects to launch the product during the third quarter of this year.

Price Performance

Shares of Elanco have declined 14.6% so far this year against the industry's 8.3% rise. The S&P 500 has witnessed a 14.3% rise in the same time frame.

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Zacks Rank & Key Picks

Currently, Elanco carries a Zacks Rank #4 (Sell).

Some top-ranked stocks in the broader medical space are Universal Health Services (UHS - Free Report) and Haemonetics (HAE - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Universal Health Services has an estimated long-term growth rate of 15.20%. UHS’ earnings surpassed estimates in each of the trailing four quarters, with the average being 8.12%.

Universal Health Services has gained 17.5% compared with the industry's 10.2% rise so far this year.

Haemonetics has an estimated long-term growth rate of 12.00%. HAE’s earnings surpassed estimates in each of the trailing four quarters, with the average surprise being 13.24%.

Haemonetics’ shares have increased 7.1% compared with the industry's 3.2% rise so far this year.

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